United States District Court, S.D. Iowa, Davenport Division
LORETTA B. MEALY, Individually and as Executor of the Estate of Terrence L. Mealy, Plaintiff,
RIVER VALLEY BANCORP, INC.; FEDERAL DEPOSIT INSURANCE CORPORATION; and LARRY C. HENSON, Defendants
For Loretta B. Mealy, Individually and as Executor of the Estate of Terrence L. Mealy, Plaintiff: Erin R. Nathan, Lynn Wickham Hartman, Mark A Roberts, LEAD ATTORNEYS, SIMMONS PERRINE MOYER & BERGMAN PLC, CEDAR RAPIDS, IA.
For River Valley Bancorp, Inc., Federal Deposit Insurance Corporation, Receiver, Valley Bank, Defendants: Jesse Linebaugh, LEAD ATTORNEY, Angela J Morales, FAEGRE BAKER DANIELS, LLP (IA), Des Moines, IA.
For Larry C. Henson, Defendant: Sean P Moore, LEAD ATTORNEY, Brian S McCormac, Jonathan M Gallagher, BROWN WINICK GRAVES GROSS BASKERVILLE AND SCHOENEBAUM, P.L.C., DES MOINES, IA.
JAMES E. GRITZNER, Chief United States District Judge.
Before the Court is a Motion to Remand pursuant to 12 U.S.C. § 1819(b)(2)(D) and 28 U.S.C. § 1447(c) filed by Plaintiff Loretta B. Mealy (Loretta or Plaintiff) and a Motion to Stay Pending the Exhaustion of Administrative Remedies pursuant to 12 U.S.C. § 1821(d)(3)(B) filed by Defendant Federal Deposit Insurance Corporation (FDIC). Both motions are resisted. The Court conducted a hearing on the motions on October 7, 2014. Representing Plaintiff was attorney Mark Roberts; representing the FDIC were attorneys Angela Morales and Jesse Linebaugh; and present observing on behalf of Defendant Larry Henson was attorney Jonathan Gallagher. The motions are fully submitted and ready for disposition.
On March 20, 2014, Loretta Mealy, the surviving spouse of Terrence L. Mealy (Terrence) (collectively, the Mealys) and the executor of the Estate of Terrence L. Mealy (the Estate), which is being administered in the Iowa District Court for Muscatine County, filed this action in Iowa District Court for Scott County against River Valley Bancorp, Inc. (RVB), an Iowa bank holding company; Valley Bank, an Illinois state chartered bank; and Iowa resident Larry C. Henson (Henson), Chairman/Director and CEO of RVB and of Valley Bank (collectively, Defendants).
A. Facts as Alleged in the Petition
The Petition alleges tat the Mealys maintained accounts, lines of credit, and loans at Valley Bank and that Valley Bank provided the Mealys with commercial and consumer loan and investment advice. Terrence formed a personal relationship
with Henson, confided and trusted in Henson, relied on Henson's advice, and frequently met with Henson to discuss Terrence's activities at Valley Bank. During this personal relationship between Terrence and Henson, fiduciary relationships were formed with Defendants. After Terrence's death, Henson continued to advise Loretta and the Mealys' son, Patrick Mealy (Patrick); Patrick assisted Loretta with the Estate matters. As part of the fiduciary relationship that had formed between Terrence and Defendants, Defendants provided investment advice to Terrence and then to the Estate and induced investments from Terrence and/or the Estate in various entities and investments. Defendants had indirect and/or direct interest in some of the entities and/or investments in which they recommended that Terrence and/or the Estate participate. Defendants provided investment advice to Terrence and/or the Estate using their fiduciary relationship with him/it to encourage him/it to invest in entities and/or investments, upon which advice Terrence and/or the Estate relied to his/its detriment.
1. July 2012 Offering
The Petition alleges that in July 2012, Loretta and the Estate were joint owners of 8053 shares of RVB stock. Henson met with Loretta to discuss a private offering of RVB stock, and on July 5 and July 12, 2012, based upon those discussions, Loretta signed letters prepared by Valley Bank for the purchase of 714 and 2480 shares of RVB stock, respectively. The July 5 and July 12 letters were not subscription agreements. Henson delivered a memorandum to Loretta on July 12 (the July 12 Memo), which, according to Plaintiff, did not disclose several facts and contained misrepresentations about the actual value of RVB, Valley Bank's performance, and other material facts known to the Defendants that adversely affected the value of RVB. The first page of the July 12 Memo stated the purchase price of the stock was $140 per share, but page 13 of the July 12 Memo stated that the current estimated tangible book value and offering price per share would be between $119 and $125 per share to be confirmed one month prior to the closing of the offering. On December 31, 2011, the tangible book value of the RVB common stock shares was $56.07. The terms of disclosures RVB filed with the SEC indicated that any sales connected to the July 2012 Offering had to be closed between August 31, 2012, and August 30, 2013.
According to Loretta, she was not provided any other memorandum relating to the private offering, notified of a proposed adjusted final offering price per share as contemplated in the July 12 Memo, advised by Defendants as to when the closing was contemplated to occur, nor informed that the final offering price of the stock in the July 2012 Offering had been adjusted as required by the July 12 Memo. Loretta alleges she never received the subscription agreement referencing the July 12 Memo, never executed the subscription agreement, never authorized the requisite payment of 20 percent of the subscription price and demand note for the balance of the subscription, never authorized payment for the stock, never received notification that the minimum of new capital subscriptions had been received by RVB, never received a request for a promissory note as contemplated by the July 12 Memo, and never received notice that a closing on the purchase of stock was contemplated.
Plaintiff alleges that in the course of the Mealys' long-standing relationship with Valley Bank as depositors and borrowers, Valley Bank applied Loretta's funds, which were in its possession from unrelated
transactions, toward the sale of the RVB stock. Based on RVB's oral and written assurances, it was Loretta's understanding that a subscription agreement and final placement memorandum would be sent and that no purchase of the RVB stock would be consummated until she received that final placement memorandum and executed the subscription agreement. Those assurances notwithstanding, Loretta denies that any subscription agreement or any other confirmation of closing and transfer of the stock was ever produced. Loretta also denies ever receiving stock certificates or other proof of ownership of new shares; rather, she alleges that it was after an inquiry by Patrick that she discovered the Mealys' total number of RVB shares was 19,742, an increase of 9285 shares, which Defendants contend Loretta purchased following the July 2012 Memo. Valley Bank refused to return Loretta's funds totaling $1,299,900 pertaining to the July 2012 Offering.
2. MidwestOne Shares
The Petition further alleges that in the fall of 2012, after the July 2012 Offering, Henson informed Patrick that MidwestOne Bank owned and was trying to sell 2400 shares of RVB stock, that MidwestOne's offer was interfering with the 2012 Offering that was underway, and asked if the Estate would be willing to purchase MidwestOne's shares of RVB stock on the same terms as in the July 12 Memo but at $88.50 per share. Plaintiff alleges that in reliance upon Henson's false and misleading representations, Loretta wrote a check to Valley Bank for $212,774 for the purchase of 2404 shares of RVB stock that MidwestOne was selling. Loretta never executed a subscription agreement, promissory note, nor received any stock certificates or other proof of ownership of the MidwestOne shares.
3. The Peters Loans
The Petition further alleges that real estate broker Fernando Peters (Peters) did business with Valley Bank brokering real property mortgages owned by Peters or other third parties that were located in New Jersey and elsewhere. On August 13, 2004, Valley Bank obtained from Terrence a $750,000 guaranty in favor of Valley Bank that guaranteed Peters' debts. According to Plaintiff, Valley Bank funded loans brokered by Peters for which Peters and/or the other borrowers might not otherwise have qualified to receive, and Defendants induced Terrence to fund those loans with his own money, through loans, lines of credit, or as guarantor, to enable Valley Bank to loan the money directly to the borrowers, while representing to Terrence that those loans were secured by first mortgages on valuable real property. Plaintiff asserts that Defendants facilitated the Peters loans, assumed a duty to monitor the Peters loans, had more familiarity with the operative facts of those loans, had superior knowledge over Terrence to investigate the creditworthiness of Peters and the other borrowers, and owed a duty to disclose this information to Terrence. According to Plaintiff, Defendants omitted key information about the Peters loans to induce Terrence to fund them, failed to make diligent inquiry about the Peters loans prior to funding and permitting Terrence to fund/guarantee the Peters loans, and allowed Terrence to charge a fee on some of the Peters loans' transactions.
Plaintiff contends that the Peters loans failed to perform and were in default, and that although represented to Terrence to be first mortgages, the Peters loans were in fact junior mortgages, and further, that the real property securing the Peters loans was not as valuable as represented to Terrence. Plaintiff further contends that Valley Bank foreclosed on securities and attempted
to foreclose on the Peters loans; Valley Bank and Peters were defendants in foreclosure actions by other lenders where Valley Bank's and/or Peters' interest was a junior mortgagee; Valley Bank failed to account to Terrence for money received on the Peters loans from the loans performance, foreclosure, and/or settlement; Valley Bank improperly charged Plaintiff's accounts for losses on the Peters loans; and that Defendants, knowing Terrence trusted and relied on Defendants' advice, exploited their fiduciary relationship in causing Terrence to fund loans without Valley Bank risking its own exposure to sub-standard loan applicants.
B. Procedural History
The Petition alleges Henson was acting within the scope of his duties as employee, officer, and director of RVB and/or Valley Bank, that RVB and Valley Bank are liable for Henson's acts under the doctrine of respondeat superior, and that Defendants' actions are the proximate cause of Plaintiff's damage. Plaintiff alleges causes of action for rescission, conversion, fraudulent inducement, violation of Iowa Code § 502.509(2), negligence and negligent supervision, breach of fiduciary duties, fraudulent misrepresentation, fraudulent nondisclosure, and declaratory judgment. Plaintiff also requests an accounting. Plaintiff requests costs of this action; and in Counts III, IV, V, VII, VIII, IX, Plaintiff requests compensatory and punitive damages.
RVB and Valley Bank accepted service on April 4, 2014, and filed answers and affirmative defenses on May 23, 2014. Henson accepted service on April 2, 2014, filed a pro se answer on April 18, 2014, and was thereafter granted an extension of time to file an amended answer. On June 10, 2014, under representation of counsel, Henson filed an amended answer and affirmative defenses.
On June 20, 2014, the Illinois Department of Financial and Professional Regulation -- Division of Banking appointed the FDIC as receiver for Valley Bank; as such, the FDIC succeeded to all rights of Valley Bank and stands in the shoes of Valley Bank. On July 29, 2014, the FDIC filed a Notice of Substitution of Party in the state court action. On July 30, the FDIC filed a notice of removal alleging jurisdiction under 12 U.S.C. § 1819(b)(2)(B).
On August 13, 2014, the FDIC filed a Motion to Stay Pending the Exhaustion of Administrative Remedies arguing a stay was mandated by § 1821(d)(3)(B). Also on August 13, Plaintiff filed a Motion to Remand arguing the state law exception under § 1819(b)(2)(D)(i)-(iii) applies, and this Court lacks subject matter jurisdiction.
A. Motion to Remand
Plaintiff argues this action must be remanded because all rights and obligations at issue in this action accrued before June 20, 2014, and thus involves only pre-closing rights against Valley Bank, or pre-closing obligations Valley Bank owed to depositors, creditors, or stockholders. Citing Empire State Bank v. Citizens State Bank, Plaintiff asserts that " remand is inappropriate by virtue of subpart three of that section only where the court must decide a 'disputable issue of federal law.'" Empire State Bank v. Citizens State Bank, 932 F.2d 1250, 1252 (8th Cir. 1991) (quoting Perini Corp. v. FDIC, 754 F.Supp. 235, 238 (D. Mass.1991)). Plaintiff contends that only interpretation of Iowa law is necessary since there are no claims, defenses, or counterclaims based upon, or raising any, questions of federal law and that the FDIC has not raised any questions
of federal law beyond its assertion that the action should be deemed to arise under the laws of the United States pursuant to § 1819. Plaintiff reasons that all three requirements of § 1819(b)(2)(D)(i)-(iii) are met, thus there is no federal question jurisdiction; and because complete diversity is lacking, there is also no diversity of citizenship jurisdiction under 28 U.S.C. § 1332. Plaintiff further asserts that pursuant to 28 U.S.C. § 1447(c), she is entitled to costs, expenses, and attorney fees incurred in prosecuting this motion because the FDIC improperly removed this case.
The FDIC resists the motion to remand arguing the state law exception under § 1819(b)(2) (D) does not apply. Citing Reding v. FDIC, 942 F.2d 1254, 1258 (8th Cir. 1991), the FDIC contends that remand is improper both because it has raised numerous colorable federal defenses and under the D'Oench, Duhme Doctrine.
1. Standard for Motion to Remand
" [A]ny civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United States for the district and division embracing the place where such action is pending." 28 U.S.C. § 1441. " [The removing party] bears the burden of establishing that the district court had original jurisdiction by a preponderance of the evidence. All doubts about federal jurisdiction should be resolved in favor of remand to state court." Knudson v. Sys. Painters, Inc., 634 F.3d 968, 975 (8th Cir. 2011) (internal citation and quotation marks omitted). " It is axiomatic the court's jurisdiction is measured either at the time the action is commenced or, more pertinent to this case, at the time of removal." Schubert v. Auto Owners Ins. Co., 649 F.3d 817, 822 (8th Cir. 2011).
2. Section 1819(b)(2)(B) -- FDIC Corporate Powers State Law Exception
The FDIC corporate powers provision, § 1819(b)(2)(B), under which the FDIC removed this case, in relevant part, provides as follows:
as provided in subparagraph (D), the [FDIC] may, without bond or security, remove any action, suit, or proceeding from a State court to the appropriate United States district court before the end of the 90-day period beginning on the date the action, suit, or proceeding ...